Moderate salary growth but tougher performance goals for execs in 2012

Firms focusing on better aligning pay with performance: Survey
|hrreporter.com|Last Updated: 11/29/2011

Corporate executives can expect moderate salary increases and tougher performance hurdles in 2012, according to a survey from consultancy Pearl Meyer & Partners in the United States. The firm’s annual preview of executive pay programs shows companies are modifying incentive-based compensation programs in response to pressures to provide a better alignment between executive pay and performance.

“Both the survey results and our client work point to a recognition by corporate leaders that linking pay to performance is absolutely essential — and that they’re less than satisfied with their current programs in that regard,” said Jim Heim, managing director of Pearl Meyer & Partners.

A significant portion of the 190 survey participants from the U.S. said they are raising their annual performance targets for 2012 incentive programs. A total of 42 per cent expect to raise the performance bar next year. This continues a three-year trend that saw 49 per cent of participants set higher targets in 2011, and 41 per cent raise standards in 2010, according to Pearl Meyer & Partners.

About one in five participants expect to change their performance measures for 2012, usually to incorporate a metric that is more closely tied to creation of shareholder value, found the survey.

“This continues a trend of moving away from the traditional and simplistic approach to goal-setting, in which a few percentage points were just added to the previous year’s performance,” Heim said.

Stock options accounted for 42 per cent of all executive long-term incentives (LTI) for participating companies with less than US$100 million in revenue, and for more than 50 per cent of value for life sciences companies. On the other end of the spectrum, they were only 15 per cent of LTI value for companies with more than US$10 billion in revenue, found the survey. Performance shares accounted for 34 per cent of LTI value at the largest companies, but only six per cent for companies with revenues less than US$100 million.

“It’s not surprising to see the largest companies denominating more of their LTI in the form of performance shares,” said Heim. “They’re under greater scrutiny from shareholders and are often at a mature stage of development where setting multi-year goals is a bit easier than what you’ll see for emerging life sciences or high tech companies.”

Companies that reported outperforming their peers in revenue growth, profitability and shareholder return generally expect to provide higher base salary increases, bonus payouts and LTI awards next year, found the survey.

Two-thirds of those strong performers predicted an increase of three per cent or more in 2012 executive base salaries, while 55 per cent expect bonuses to exceed internal targets for 2011 performance and 31 per cent expect larger LTI awards in fiscal 2012. In contrast, only one-quarter of the poor performers projected a base salary increase above three per cent or an “above target” bonus payout, and only 18 per cent said LTI award values would increase, found the survey.

“Normally we’d expect more of the poor performers to switch up their incentive metrics for fiscal 2012, but apparently their appetite for change is no larger than that of the strong performers,” said Heim. “Most likely, many lesser performers believe they are using the right metrics, but their executive teams just are not executing.”

Relatively modest growth in executive salaries is expected in 2012, marking a continued break from the annual four per cent pay growth of most of the past two decades. A total of 59 per cent of participants projected a two to four per cent salary increase, and 10 per cent anticipate a salary freeze or decrease next year, found the survey.

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